DOE OFFICE OF INDIAN ENERGY

Key Concepts Narrowing project options, selection, ownership through pros and cons

LEVELIZED COST OF ENERGY

2

Key Concept: Levelized Cost of Energy (LCOE)

3

• Measures lifetime costs divided by energy production, captured in $/MWh or ¢/kWh

• Calculates present value of the total cost of – Building – Operating a power plant over an assumed lifetime

• Allows the comparison of different technologies (e.g., wind, solar, natural gas) of – Unequal life spans – Project size – Different capital cost – Risk, return, and capacities

Adapted from European Wind Energy Association, “Economics of Wind Energy,” http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf

Annual Expenses Including Fuel (if Diesel) and O&M Initial Costs Less

Grants Plus Financing

Energy System

Total Cost Per Year Annual

Energy Production

LCOE ($/kWh)

× $$$ Site

Characteristics/ Resources

$

LCOE Concept

4

kWh

& D

LCOE for Wind Energy in Alaska

5

A wide range of estimated wind LCOE for a variety of wind turbine types utilized In Alaska:

Cost of Energy Analysis

6

TRIBAL ROLES

7

Potential Team Members

8

• Village Members Leadership, staff, community members Attorneys, engineers, professionals

• Developer Business managers, engineers, permitting specialists, investors, banks,

attorneys, accountants, power marketers, procurement specialists, communications, public relations, government relations, corporate finance, project finance, construction managers, O&M specialists, asset managers, etc.

• Utility Engineers, attorneys, planning specialists, operations specialists, regulatory

specialists, finance, accounting, public relations, communications, systems operators, construction and field personnel, maintenance and emergency operations, etc.

• Government Village government, federal, state, local entities, regulating bodies (public

utilities commission), Bureau of Indian Affairs, DOE, Federal Energy Regulatory Commission, etc.

The Role of the Project Champion

9

Project Champion

Employ relevant expertise: legal and

finance; technical and construction;

power marketing

Ensure all relevant players are engaged in the project at the right time,

levels, and roles

Engage Village leadership and project and

business management (professionals

and staff)

Village

10

Village Role Options

Renewable Resource/Land

Owner/Land Lessor*

Off-taker or Energy User

Lender/ Debt Provider

Equity Investor/

Generation Equipment

Owner

Project Developer

Project Operator/O&M

* Also called Tribal Host

11

1 Potential

3 Refinement

5

Operations & Maintenance

2 Options

4 Implementation

3 Refinement

12

INTERCONNECTION

What is Interconnection?

“The technical rules and procedures allowing customers to ‘plug in’ to the grid.” Source: Solar Energy Industry Association. Issues and Policies: Net Metering, accessed Aug 11, 2013. http://www.seia.org/policy/distributed-solar/net-metering

13

What is Interconnection?

“The technical rules and procedures allowing customers to ‘plug in’ to the grid.” Source: Solar Energy Industry Association. Issues and Policies: Net Metering, accessed Aug 11, 2013. http://www.seia.org/policy/distributed-solar/net-metering

14

What is Interconnection? (cont.) • Agreement required to connect your facility-

or community-scale system to the grid • Distribution-level interconnection is largely

the domain of state policy – Rules and regulations are highly variable

between states • Involve your utility early and often in the

project development process – Many utilities have their interconnection

procedures and the necessary contacts posted on their website

15

Common Interconnection Elements • Application • Designated interconnection utility

representative • Generator size thresholds

– Different tracks for generators of certain sizes – Fast-track procedure for systems smaller than a

certain size (generally ~2 MW) – Technical screens, feasibility studies, etc., for larger,

more complex systems • Timelines for each step • Standard agreement between utility and

customer

16

17

INTERCONNECTION AND NET METERING

What is Net Metering?

“Net metering allows residential and commercial customers who generate their own electricity from [eligible technologies] to feed electricity they do not use back into the grid” for utility credit. Source: Solar Energy Industry Association. Issues and Policies: Net Metering, accessed Aug 11, 2013. http://www.seia.org/policy/distributed-solar/net-metering

18

Interconnection & Net Metering

• Required Agreements • General Process for Interconnection • How to Find Utility Rules on Interconnection • Common Missteps and Caveats

19

Net Metering Variations • Net metering works best for

– Home owners (not renters) – Single dwellings (not multi-unit homes/businesses) – Customers located in same utility territory – Distributed generation (DG) located in the same

utility territory • Variations on net metering allow for broader

participation – Group billing – Virtual net metering – Joint ownership

20

Virtual Net Metering • Similar to group billing

– Multiple participants receive net metering credits from a single renewable system

– Offsets load at multiple retail electric accounts – Must be within a utility’s service territory

• As with traditional net metering, credits appear on each individual customer’s bill, instead of on a group bill

• Sometimes, the DG system is not required to be behind the customer’s meter

• Examples: Colorado, Delaware, Massachusetts, and California

21

Group Billing • Allows multiple participants to receive net metering

credits from a single renewable energy facility – Great for multi-family homes or multi-tenant business

buildings – Utility’s rules must allow for group billing

• Utility plays an active role – Produces group bill for all energy consumption and charges – Output from net metered system is credited against group bill – Remaining costs are allocated according to participant

agreement • Requires

– Customer representative as utility contact to do administrative work

– Creditworthy customer representative • Example: Vermont

22

What is Interconnection? (cont.) • Agreement required to connect your facility-

or community-scale system to the grid • Distribution-level interconnection is largely

the domain of state policy – Rules and regulations are highly variable

between states • Involve your utility early and often in the

project development process – Many utilities have their interconnection

procedures and the necessary contacts posted on their website

23

Common Interconnection Elements • Application • Designated interconnection utility

representative • Generator size thresholds

– Different tracks for generators of certain sizes – Fast-track procedure for systems smaller than a

certain size (generally ~2 MW) – Technical screens, feasibility studies, etc., for larger,

more complex systems • Timelines for each step • Standard agreement between utility and

customer

24

25

PROCUREMENT

Procurement Process

Facility- and Community-Scale Projects

26

Negotiate Contracts

Make Selection

Develop and Issue RFP

• Potential Project Partners to Procure – Consider the General Services Administration (GSA) as a

resource for procurement: http://www.gsa.gov/portal/category/20998

– Project developer – Engineering, procurement, and construction (EPC) contractor – Environmental permits contractor

• May apply to some community projects, but not to others

Outline of the RFP Process 1. Develop RFP

― Timeline: 1 month to 1 year (depends on project scale and site complexity)

― Who creates the RFP: project leader, contract officer/lawyer, site manager(s), energy manager and technology expert. RFP writers will receive input from utility, tribal leaders, and stakeholders

― RFP content

2. Issue RFP

Tribal, federal, and industry networks

3. Administer the RFP ― Proposal meeting(s) ― Site tour(s) – can be concurrent with proposal meeting ― Q&A process – ensure all developers get same information

4. Evaluate Criteria ― Should be a clear process with well defined criteria ― Evaluation panel recommended to consist of an odd number of members (typically 3 to 7)

5. Award Contract

― Four approaches

27

Develop RFP

Key Elements of the RFP • Type of procurement

― Purchase ― Power Purchase Agreement (PPA) ― ESCO

• Technical specification (scope of work) • Criteria for evaluating proposals: 3–5 of most important project

aspects ― Proposed project solution that meets specified criteria ― System performance guarantee ― Developer experience, track record, and customer satisfaction ― Developer financial health/longevity ― Maintenance plan ― Reasonable timelines ― Other

28

Develop RFP (continued) Key Elements of the RFP

• Description of RFP administration process ― Typically 2–5 months ― Key dates: proposal meeting(s), sites visit(s), proposal due date ― Description of how questions will be handled and answered

• Defining responsible parties ― Who is responsible for permits ― Who is responsible for interconnection agreements ― Who is responsible for applying for incentives

• Any preferences on parties allowed to submit proposals ― Small business ― Minority-owned ― Other

• Land use agreements ― Address site access and land use issues as relevant to ownership model

29

RFP Evaluation Criteria Two Typical Approaches • Best value:

― Typically 3–5 criteria with weighting based on importance

― Score proposal on each criteria

― Somewhat subjective and can lead to contentious, time-consuming evaluations but good method to capture best value

• Low price, technically acceptable ― Proposals initially stripped of pricing/cost information

― First evaluation determines proposals that meet technical hurdle

― Technically acceptable proposal with lowest cost gets award

― More transparent process but may not capture best value

30

31

BUSINESS STRUCTURES AND BONDS

Business Structure Options for Tribes • Tribal government

entities – Unincorporated

instrumentalities – Political subdivisions

• Section 17 corporations

• Tribally chartered corporations

• State law entities – State law corporations – Limited liability companies

(LLCs)

• Joint venture

32

NREL Photo #07958

Business Structure: Tribal Government Entities Option 1: Unincorporated Instrumentalities

Advantages

• Easy to form

• Management is centralized

• Not subject to federal income tax

• Same privileges and immunities as tribal government

Disadvantages

• Politics and business are not separated

• Assets and liabilities of the enterprise not separated from governmental assets

• May preclude equity ownership by outside investors

Option 2: Political Subdivisions

Advantages

• Exempt from federal income tax

• Retain sovereign immunity

• May issue tax-exempt bonds

• Ability to form a corporate board

Disadvantages

• Timely and costly to form the entity

• Not as much flexibility as corporations and LLCs

• May deter certain business partners

Source: Office of Indian Energy & Economic Development 2008

33

Business Structure: Section 17 Corporations Tribes can form corporations under Section 17 of the Indian Reorganization Act of 1934

Advantages

• Same privileges and immunity as the tribal government, including tribal sovereign immunity

• Separates the assets and liability of the corporation from tribal asset

• Not subject to federal income tax

Disadvantages

• Lengthy timeline to obtain a corporate charter

• Corporation must be wholly owned by a Tribe

• Example of Section 17 Corp: S&K Technologies, Inc. – Environmental restoration – Stream channel reconstruction – Native plant re-vegetation – Civil construction

Tour of the Ponnequin Wind Farm. Photo by NREL 09827

34

Business Structure: Tribally Chartered Corporations

35

Rooftop PV installation on the Forest Country Potawatomi Tribe administration building. Photo from Forest County Potawatomi Tribe, NREL 20107

• Formed by tribal ordinance or tribal corporation code

• Must select a name and draft articles of incorporation

• Best utilized to operate on reservation as an arm of the tribal government

• Example: Ho-Chunk, Inc. – Information technology – Construction – Government contracting

Business Structure: State Law Entities

36

State Law Corporations and LLCs Advantages

• Quick and easy to organize

• Familiar to lenders and potential business partners

• Can be used to acquire or merge with an existing state-law entity

Disadvantages

• Subject to federal income tax

• May not issue tax-exempt debt

Weather Dancer 1 wind project in Alberta, Canada. Photo from Piikuni Utilities Corporation, NREL 13792

Business Structure: Joint Venture – LLCs or Limited Partnerships

37

NREL Photo #18691

Advantages • Acquire energy project development

expertise

• Secure project financing

• Enjoy benefits of federal incentives (e.g., tax credits)

Disadvantages • Likely loss of sovereign immunity for

the joint venture entity

• Inability to qualify for certain kinds of financing 7.1 kilowatts of residential solar PV

Bonds: Clean Renewable Energy Bonds (CREBs)

• CREBs – Apply to the IRS for an allocation – Federal tax credit to bond owner in lieu of interest payment

from bond issuer – May be more attractive than tax-exempt municipal bonds

• Issuer only pays back bond principal (for most part)

• Total allocation of $1.2 B – Up to 62.5% for public sector projects (rest: coops) – Round 1: 401 of 610 public sector PV projects – Round 2: $262MM for public-sector PV projects – Additional rounds possible

38

Bonds: CREBs cont. Challenges • Not truly equivalent to interest-free bond

– Assumes bond issuer is equiv. to AA corporate – Public entities with weaker credit must either:

• Make supplemental interest payments, or • Sell the bond at a discount

• Transaction costs are high – Allocations made from smallest to largest projects – Solution: MA bundled 12 projects (1 MW)

• First principal payment due in December of the year the CREB is issued

39

Bonds: Green Bonds

• Finance tool for green projects: projects and activities that promote climate and other environmentally sustainable purposes – Renewable energy – Energy efficiency – Sustainable waste management – Clean transportation

• Nascent market for institutional investors who have climate considerations in their investment objectives – Currently led by international organizations (World Bank,

International Monetary Fund) – Some states beginning to look at these instruments (MA has

issued some green bonds)

40